LONDON: The euro fell to a seven-week low in thin trade on Thursday after German Chancellor Angela Merkel said she still does not think common euro zone bonds are necessary, adding to concerns policymakers cannot agree a way out of the debt crisis.
Merkel's comments following a meeting with the leaders of France and Italy, came the day after a weak German government bond auction fuelled fears that even the safe-haven status of Europe's biggest economy could be under threat.
Although few market participants expected significant progress at the meeting, Merkel's continued resistance to euro bonds or changing the role of European Central Bank led some investors to add to bearish positions.
The euro was last trading flat on the day at $1.3326, near a seven-week trough of $1.3316, the lowest level since Oct.6.
"The meeting has passed and we are still waiting for a more effective policy response, these are not encouraging signs. The recent bear trend for the euro remains in place," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.
Downside risks dominated the near-term outlook for the euro, with many investors still looking to sell into any bounce. Good offers were cited above $1.3415 and $1.3450.
Bearish market sentiment meant the single currency was still on track to retest the October low of $1.3144, having retraced more than 78.6 percent of the rally from that level to the late October high of $1.4247.
Analysts said thin trading volumes as a result of the Thanksgiving holiday in the United States was exacerbating many of the moves.
A surprise pick-up in the German Ifo, a business sentiment survey, supported the euro in early European trade, though traders said the data was unlikely to temper fears about the possibility the euro zone economy could face recession.
The euro also gained a brief boost from a Reuters report that the European Central Bank is considering extending the terms of loans to banks to two or three years to prevent the euro zone crisis sparking a credit crunch.
But both rallies petered out, not helped by rating agency Fitch downgrading Portugal to junk status.
"The market seems to be of the mind that it wants to sell the rally. It is taking a bit of a breather and that Ifo number has given some support but I am not sure it's sustainable," said Gavin Friend, currency analyst at National Australia Bank.
BOND MARKETS EYED
Germany's bond sale on Wednesday was its least successful since the launch of the single currency. Although unattractively low yields played a part, investors worried about the rising cost of bailouts as more euro zone countries come under attack.
German Bund futures fell to their lowest level in nearly a month, and Italian 10-year government bond yields climbed back above the critical 7 percent level.
Belgian bond yields also continued to unnerve investors, rising further as the country -- without a formal government since elections in June 2010 -- struggled to agree on a deficit-slashing budget for next year.
The euro slipped 0.3 percent versus the yen to an almost seven-week low of 102.83, opening the way for a test of the decade-low of 100.77 yen hit in early October.
The Australian dollar clung on to its gains on the day, last up 0.4 percent at US$0.9721, having slid to a seven-week low of $0.9664 on Wednesday on concerns about a deteriorating global growth outlook.
Meanwhile, the dollar slipped 0.3 percent against the yen to 77.11 yen, with its rise to a near two-week high on Wednesday, when Tokyo was on holiday, luring Japanese exporters to sell.
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